Mackenzie

Review of the Business

Mackenzie is a multi-faceted investment management and financial services organization whose core business is the management of mutual funds on behalf of investors across Canada.

Asset Management Operations

In 2002, the TSX decreased 14% to 6614.50, an annual level last seen on December 31, 1997. The Standard & Poor’s 500 Composite Total Return Index declined for the third consecutive year, an event that has happened only twice before in the past 80 years. Despite overall economic conditions, Mackenzie gained market share during 2002 and finished the year with $30.9 billion in mutual fund assets under management. Net sales of funds were $288 million for the year ended December 31 2002, compared with net sales of $280 million during 2001.

Mackenzie’s investment managers continue to outperform most of their industry peers, which is a key factor in relative industry sales strength. When investors consider their retirement needs, they inevitably return to the capital markets for superior long-term real rates of return. Recent market research indicates that investors have adopted a more prudent approach and more realistic expectations for their rate of return. Such an attitude fits well with the high quality long-term style of funds offered by Mackenzie.

As of December 31, 2002 Mackenzie offered 149 mutual funds and 39 segregated funds held by over 1.5 million clients. In addition to the strong Mackenzie brand, funds fall under five key family names: Cundill, Ivy, Keystone, Maxxum and Universal. Different investment styles prevail from time to time but Mackenzie is committed to offering top quality investment products in any market climate. Mackenzie offers a great depth and breadth of product and employs leading management teams worldwide. In repeated surveys, financial advisors rank Mackenzie’s broad product mix as Mackenzie’s #1 competitive advantage.

A prime example of Mackenzie’s quality fund management is found in Jerry Javasky, selected as the recipient of the 2002 Analysts’ Choice Fund Manager of the Year Award. Jerry Javasky heads the investment team managing Ivy Canadian Fund, Ivy Growth & Income Fund, Ivy Foreign Equity Fund, Ivy Global Balanced Fund (winner of the 2002 Analysts’ Choice Award Global Balanced Fund) and Ivy European Fund. Ivy managers have a presence in 1.1 million Mackenzie accounts, and manage $13.5 billion in assets as of the end of 2002.

Over the past year, Mackenzie built on this strength by simplifying its product line, consolidating funds with similar or duplicate mandates while at the same time enhancing the strength of existing products.

To achieve this streamlining, Mackenzie merged 29 mutual funds this year. Many of these funds were portfolios that offered similar or identical mandates to each other. The decision was taken in 2002 to retire the Industrial Group of Funds brand, with these funds being merged into others. In all cases, these mergers were achieved with no increase in fees, no additional costs to unitholders, and no tax implications for those investors who made an election under Section 85 of The Income Tax Act. Mackenzie also renegotiated a number of major sub-advisory agreements during the year, reducing rates per dollar of assets managed.

Mackenzie also made several changes to existing funds. Through a series of product changes, a broader range of equity and balanced products was introduced under the Maxxum brand, which had been transferred to Mackenzie from Investors Group. Fixed income product offerings under the Mackenzie name were enhanced, through the re-branding of Mackenzie Short Term Bond Fund. Mackenzie also launched Ivy European Capital Class, Universal American Growth Capital Class and Ivy RSP Global Balanced Fund in 2002.

During the year, Mackenzie also built on the strength of the Capital Class funds structure, introducing Mackenzie Managed Return Capital Class. This unique product offers investors a tax-advantaged alternative to a bond fund. This fund is expected to play an important financial planning role for investors wishing to add a fixed income component to their investment portfolio. As part of the Capital Class structure, the fund offers investors the flexibility to switch between 38 funds, with the added ability to avoid realizing a capital gain while their assets remain in the corporate structure.

In March of 2002, Mackenzie introduced the T-Series units on seven leading balanced funds. The T-Series provides investors with stable monthly cash flow that allows for the potential of some tax deferral. T-Series is ideally suited for conservative, tax-sensitive investors requiring steady monthly cash flows. The Mackenzie T-Series acts like a systematic withdrawal plan for the investor, providing monthly cash flow but without initiating any taxable gain until the funds are sold.

Mackenzie’s venture capital partner, VenGrowth, launched two funds for the national market. This launch made VenGrowth Canada’s largest national retail venture capital firm. Also as a result, Mackenzie wholesalers from coast to coast are able to offer these products for the benefit of advisors and investors.

One of Mackenzie’s competitive advantages has been industry leading product and service innovation. Technical work has been completed on two major innovations that we expect to be meaningful for the industry in the years ahead. The first is targeted at further improving the tax efficiency of mutual funds relative to holdings of an individual portfolio of securities. Several new products and services using this technology will be introduced in 2003. These products will enhance the effectiveness of Mackenzie Capital Class Funds that were recently rated by an independent analyst as among the most tax efficient in the industry.

Secondly, a long-term project has been completed whereby M.R.S. Trust was able to provide Canadian content qualification to both Mackenzie’s and Investors Group’s foreign funds for registered accounts. Mackenzie is the first non-bank owned fund company to be able to produce its own clone funds.

Dealer, Trust and Administration Services

The MRS Group of Companies (MRS Group) provides mutual and segregated fund dealers, financial advisors and their respective clients with a broad array of products and services to heighten their competitive advantage and scale in the financial services marketplace.

Multiple Retirement Services Inc. is the largest mutual fund carrying dealer in Canada and a Mutual Fund Dealers Association of Canada member firm. M.R.S. Securities Services Inc. is a boutique carrier for investment dealers, a discount broker and an Investment Dealers Association of Canada member firm. Winfund Software Corp. is the largest and fastest growing provider of software to Canadian mutual fund dealers. Federally regulated M.R.S. Trust provides loan,
deposit and selected trustee and custodial services to complete the comprehensive MRS Group offering. Intra-corporately, in 2002 M.R.S. Trust has also assumed responsibility for a portion of the Mackenzie mutual fund RRSP Clone counterparty activity, and registered plan trusteeship for Investors Group Securities Inc.

Collectively, the MRS Group offers more choice of operational, software or web-based service solutions and products to mutual and segregated fund distributors than any other supplier in the Canadian marketplace. In business for over 20 years, the MRS Group employs more than 400 people, has over $18 billion in client assets under administration, and services more than 800,000 investor accounts. MRS Group success ensures a stronger and more competitive market for segregated and mutual fund distribution, with collateral benefit to Mackenzie.

United States Operations

Following a strategic review initiated in 2001, Mackenzie also completed the US$70 million sale in December 2002 of its US subsidiary, Mackenzie Investment Management Inc. (Mackenzie Investment), to Waddell & Reed Financial, Inc. (Waddell & Reed), a leading mutual fund company in the United States. Mackenzie Investment shareholders received an attractive all-cash price of US$4.05 per share. Proceeds of CDN$94.7 million from the Mackenzie Investment transaction were used to repay bridge financing incurred on the acquisition of Mackenzie by Investors Group Inc.

Following the completion of this transaction, Mackenzie appointed Waddell & Reed to act as sub-advisor to a number of funds, including Universal Select Managers Fund, Universal Select Managers Capital Class, Universal Select Managers USA Capital Class, Universal U.S. Blue Chip Fund, Universal U.S. Blue Chip Capital Class, Universal World Income RRSP Fund, and a portion of Mackenzie Yield Advantage Fund. Waddell & Reed are highly respected for their consistent results as asset managers, and are rated by both Lipper and Barron’s as one of the top ten mutual fund families in the United States over five and ten-year periods.

Successful Affiliate Relationships

A considerable amount of time and effort has been devoted to Mackenzie’s new role as a member of the Power Financial Corporation group of companies. There is opportunity to improve customer service, enhance advisor support, expand distribution and lower costs. All of these are being realized. As an example, the Mackenzie and Great West Life data centres were combined to improve cost and service efficiency. The data centre is now managed as a shared service.

Assets Under Management and Administration

Table 5: Changes in Assets Under Management and Administration - Mackenzie

Mackenzie’s mutual fund assets under management were $30.9 billion at December 31, 2002, a decrease of 7.6% from $33.4 billion as at December 31, 2001. During the year ended December 31, 2002, sales of Mackenzie’s mutual funds were $6.0 billion, an increase of 9.6% from 2001. Net sales were $288 million for the year ended December 31, 2002, compared with net sales of $280 million in 2001.

Market performance negatively impacted mutual fund assets by $2.8 billion during the year, as compared to $832 million in 2001. Mackenzie’s average mutual fund assets under management for the year ended December 31, 2002 were $32.3 billion, as compared to $31.2 billion in the previous year. On October 5, 2001 Investors Group transferred the Maxxum operations to Mackenzie. Maxxum’s $2.2 billion of mutual fund assets under management have been included in Mackenzie’s average mutual fund assets from that date.

Despite the decline in assets under management from the beginning of the year, there has been a positive shift in the mix of sales towards long-term mutual funds, primarily a result of favourable contributions from Mackenzie’s value-oriented funds in the Ivy and Cundill families. Sales of long-term funds (excluding money market and Managed Yield funds) were $4.3 billion in 2002 compared with $2.8 billion in 2001, an increase of 55.4%. Net sales of long-term funds were $700 million in 2002, as compared to net redemptions of $627 million in the previous year.

The strong relative performance of Mackenzie’s mutual funds has contributed to this improvement. In December 2002, Mackenzie again earned the top spot in Morningstar rankings for offering the most five-star funds of any fund company in Canada, a position Mackenzie held throughout 2002. Morningstar’s Star Ratings are an objective, quantitative measure of a fund’s historical risk-adjusted performance relative to other funds in its category, of which the top 10 per cent of the funds in each category get a five-star rating.

In addition to its mutual fund business, an important component of Mackenzie’s operations is the provision of investment management, administration and distribution services for other investment products. As at December 31, 2002, Mackenzie had $130 million in segregated funds; provided investment management services to private and institutional accounts with assets of $2.4 billion; and provided administration and distribution services to venture capital funds with $0.9 billion in net assets.